The Financing Debate The Best Combinations And Tools For Raising Funds

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The Financing Debate The Best Combinations And
Tools For Raising Funds
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Ask any entrepreneur about what is his 1
expectation from a CFO and he/ she is likely to
tell you 'Raising funding'. A CFO who has
experience in raising debt (borrowings) and
equity is an invaluable asset to any
business. Curiously, the best contribution that
a CFO can make to the funding decision is to
raise the question of 'whether this funding is
needed at all?' Far too often, companies are
guilty of raising funding for the incorrect
requirements (examples lavish offices, funding
long credit periods of customers, production
facilities with unrealistically high capacities,
unplanned marketing and advertising etc).
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A CFO needs to be the conscience keeper of the
business and ask this difficult question. If he
is convinced that the company needs funding for
the right reasons, it becomes his/ her
operational responsibility to go out and raise
funds at the right pricing.
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A fundamental principle of funding is to match
the nature and tenure of the source of funds with
the nature and tenure of the application of
funds. Capex spends with long gestation periods
are best financed through long term loans,
working capital requirements for debtors and
stocks are best funded through short term loans
and new, 'risky' ventures are best financed
through equity. A number of companies raise
funding (either debt or equity) for funding opex
losses. This is a very bad idea, unless you have
a very clear idea of how and when the opex losses
are going to be recouped (eg ecommerce). It is
amazing how many companies make the fundamental
mistake of raising long term money for short term
purposes and vice versa. CFOs need to take
ownership for these decisions and be disciplined
about it.
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Once a CFO is clear about the nature and tenure
of funding, he/ she need to think about the
pricing of the financing line. Debt funding is
usually easy to price, considering interest rates
are discussed and negotiated with bankers and
other lending institutions. Equity is far more
difficult to price. A common mistake that
several entrepreneurs make is to think of equity
as 'free money'. Nothing could be farther from
the truth. A good CFO will educate his CEO/
Promoter why equity is probably the most
expensive way to raise funding. A good CFO also
pays attention to the non-financial terms and
conditions attaching to the financing line.
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These include tenure of the loan, repayment
schedule, moratorium period, documentation
charges, security requirements, collateral
requirements, inspection procedures, frequency
and costs, insurance of assets provided as
collateral, frequency of reporting, consequences
of breach of covenants, restrictions on end use
of funds, and several other factors.
Entrepreneurs need their CFOs to be able to
navigate through these terms, negotiate with
lenders and make a recommendation on the right
solution.
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Getting the financing mix right is the equivalent
of a well cooked meal. Like a good cook, the CFO
needs to understand the business (the diner), the
quantum of funding required (how much food to
make), use the right mix of products
(ingredients), buy the products at the right rate
(price of ingredients), raise money from the
right institutions (quality of the ingredient).
Fortunately for businesses, CFOs have a wide
variety of 'ingredients' to choose from today.
Apart from traditional working capital and term
loans, CFOs can access public markets in India
and overseas
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(eg AIM), forex denominated debt in the form of
External Commercial borrowings, rupee denominated
debt from overseas or domestically in the form of
Convertible Debentures, venture capital from
angels or VC funds, growth equity from Private
Equity firms, access public markets in India
through BSE, NSE or SME exchange, raise loans
and/ or structured debt instruments from NBFCs,
raise bridge financing or high risk capital from
hedge funds, raise performance linked quasi
equity products like Compulsory Convertible
Preference Shares. There is no shortage of
capital in the market today. What is in shortage
is good quality CFOs who can help entrepreneurs
decide what is right financing mix for the
company. An incorrect choice can often be life
threatening to businesses.
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There can be no one 'correct' answer to 'what is
the right funding mix'.  Just as the answer to
the question on 'what is the best food to have'
will depend on the time of the day, how hungry
you are, what is available in the locality, your
budget etc, the 'right funding mix' will depend
on circumstances that are specific to you.
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